Fitch affirms Kazatomprom at 'BBB-'; outlook stable
Baku, Azerbaijan, Nov. 5
By Elena Kosolapova - Trend: The international rating agency Fitch Ratings has affirmed Kazakhstan-based National Atomic Company Kazatomprom's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable outlook, the rating agency reported on Nov. 5.
The company's Long-term IDR affirmed at 'BBB-' with stable outlook, Short-term IDR affirmed at 'F3', Foreign currency senior unsecured rating affirmed at 'BBB-'.
"The ratings reflect Kazatomprom's standalone profile due to limited links with its ultimate parent - Republic of Kazakhstan (BBB+/ Stable). Its standalone profile primarily reflects the company's leading position in global uranium mining, the fact that most of its uranium production volumes have been contracted over the medium term, and its competitive cash costs compared with those of its global peers," the agency said.
At the end of the first half of 2014 Kazatomprom's cash and cash equivalents stood at 17 billion tenge (180.87 tenge = $1) which, together with short-term deposits of 3 billion tenge (mainly with Kazakh banks) and available unused credit facilities of 20 billion tenge, are not sufficient to cover short-term maturities of 116 billion that is mainly represented by the $500 million eurobonds due in May 2015.
The company is currently negotiating new loans with the banks to refinance the eurobonds and expects to conclude loan agreements by end-2014.
In 2013 Kazatomprom reported funds from operations (FFO) gross adjusted leverage of 2.4x and may exceed the negative rating guidance of 2.5x at end-2014 on account of falling uranium prices and an intensive capex programme of about 90 billion tenge over 2014-2018, which is likely to be partially debt funded. However, the agency expects leverage reduction to about 2.4x during 2015-2017 as a result of a cutback in investment plans. This supports the Stable Outlook.
Uranium oxide (U3O8) prices continued to fall in the first half of 2014 as a result of sustained oversupply of uranium products on the market, and reached $28/pound, last seen in 2005. However, this trend has started to reverse in the second half of 2014 as uranium prices gradually increased to $35.65/pound in mid-October. In Fitch's view, a sustained decline in uranium prices would have a lasting negative impact on Kazatomprom's earnings given the inclusion of spot price elements in its existing long-term sales contracts. The agency does not expect prices to recover to pre-2013 levels in our projections for the company.
"Kazatomprom's ratings are constrained by limited diversification and exposure to uranium price volatility. The latter could be mitigated by the expected implementation of the company's vertical integration strategy and shift to higher value-added products and services in the long term, as well as by its strong market position, low-cost production, contracted sales and ramped-up production," the agency said.
Kazatomprom's investment-grade rating continues to be primarily driven by its leading position in global uranium mining, stable operating profile, the fact that most of its uranium production volumes have been contracted over the medium term and its competitive cash costs compared with those of its global peers, according to Fitch. In 2013, Kazatomprom maintained its leading position in global uranium mining with a market share of 21 percent.
Despite the closure of all nuclear power reactors in Japan and about half in Germany, Fitch expects the use of nuclear power to continue given its environmental advantages and ability to contribute to the reduction of greenhouse and other gases and substances.
"We expect uranium requirements to fuel reactors will continue and may increase in the long-term, especially after putting into operation about 70 power reactors that are currently under construction worldwide, mainly in the developing countries. Therefore we consider uranium sector fundamentals to be fairly strong over the long term," the agency said.
Kazatomprom's reduction of FFO adjusted gross leverage to below 1.5x on a sustained basis could lead to positive rating actions. However, Fitch does not forecast such deleveraging to take place in the medium term due to Kazatomprom's intensive capex plans and falling uranium prices.
Successful implementation of the vertical integration strategy, while maintaining a sound financial profile, can also lead to positive rating actions.
Failure by the company to secure refinancing by end-2014 and deterioration of FFO adjusted gross leverage above 2.5x on a sustained basis due to, among other things, a more aggressive capex programme, acquisitions and/or lower-than-expected uranium prices can lead to negative rating.